Why property investors keep making mistakes

I have made more mistakes than I can poke a stick at. I continue to make them. I try not to, but somehow they just seem to happen.

If you only knew about my property stuff ups – oh, I could write a book.

But as Billy Joel once sang, You’re not the only one who’s made mistakes – But they’re the only thing that you can truly call your own.

So true, Billy – and a good call naming this song You’re Only Human & not Second Wind like originally intended – but there are many reasons why we consistently make mistakes, especially business or investment-related ones.

Many of our mistakes are due to ‘thinking habits’ that unfortunately occur subconsciously.

It might take real effort to avoid them. It might be absolutely useless trying.

But some seem to avoid mistakes more than others. Astute?

Or do they just understand how our brains work?

Same opinions

We like people who think like us.

We read or watch stuff that we agree with.

We agree with someone’s beliefs if they are similar to our own. Group think rules.

So when it comes to property analysis – it pays to look outside of the box.

I prefer to hear what say Hugh Mackay has to say about the property market & housing demographics rather than most economists.

Illusion

We are constantly bombarded with illusions.

Urban myths.

Living alone in an apartment is better for the environment than living in a family group in a detached house.

Inner city rental returns are better than those further away from the GPO.

Private schools provide better education.

A quarter of us live alone. Moving home will help change your life.

The list goes on & on.

Advertising campaigns capitalise on these predispositions.

Best to question assumptions until some real evidence is in support.

Sunk cost

I am so guilty of this one.

A sunk cost refers to any cost (not just money, but also time & effort) that has already been paid & cannot be recovered.

Yet most of us cannot let it go. Apparently, we feel loss more strongly than pain.

Many buyers finally make an offer on a property, not because they have found their ideal home, but because the need to recoup the time invested in looking is starting to rub.

Or on a more everyday level, if we paid to go to see a movie and it stinks, most of us stay and watch it rather than walk out & do something better with our time.

Another frequent occurrence of sunk cost is confusing the past with current events or facts.

I bought an investment property once, but it didn’t do that well, so I’m not buying one again. I don’t care what anyone says or how good the potential return is.

Values or rents have not increased in that area in the past, so they won’t in the future.

Developers are very guilty of sunk cost.

They paid X for the site; have an approval for 200 dwellings & spend a lot of time & effort getting the site & this approval.

They should make XXX profit.

But the market has changed – it would be best to build 150 dwellings; reduce their construction costs; change the product & maybe find a JV partner.

Yes, the potential profit is now XX.

And the chances of getting the XX are far greater than XXX; but too often the sunk cost drives the outcome.

Well, at least the receiver has another job to do!

And despite all the bravado, developers are only human too.

A lot of them seem to like Billy Joel, as well.

Rationalisation

We are driven by our actions first & what we think, second.

The usual drill here is that we need to rationalise our behaviour. So we make up reasons to support why we bought something, for example, after we have paid for it.

When the reasoning comes up short, it is called buyer’s remorse.

The reverse situation applies too.

In today’s digital age, we witness this quite a bit in property blogs and the like.

Someone who cannot afford to buy a property puts shite on those who can & their arguments are rationalised by their inability to buy a property (inaction, so to speak), rather than any real logic, let alone evidence.

The market is going to crash. Housing is so unaffordable. Negative gearing is evil. Baby boomers are just money grabbing cretins.

Our actions drive our thinking.

Anchoring

We make choices based on an anchor point.

Often this anchor is meaningless in the scheme of things, but it has a major impact on what we actually do.

Let’s use a new apartment sales pitch as an example.

All three examples are for the same apartment.

Option A is an apartment priced at $435,000

Option B is to buy a furniture package for $15,000 to suit the apartment

Option C is for an apartment/furniture combo priced at $450,000

Option B is useless unless you buy an apartment, yet most buyers choose Option C when presented with these three choices. Remove Option B and most investors choose Option A.

So if it is in the developer’s interest – given the deal done with the furniture supplier maybe – to sell more packaged stock, then offering three such options seems to work.

My experience is that most people behave somewhat erratically & their decision making process is anything but stable.

Most of us are irrational & illogical, even when the facts are seemingly obvious.

And contrary to those who make most property comments i.e. economists, it is the broader based professional – psychologist; town planner; geographer; demographer – who makes the more meaningful market assessments.

Nothing wrong with specialists, but they often see things through a narrow perspective & also try; more often than not; to apply logic to an illogical domain.

Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive

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